TikTok stands accused of poisoning the minds of Gen Z, making them hate America and giving them a distorted view of history. Without getting into all that, I will say this: TikTok is not the worst place to learn about personal finance.
A few years ago, James Choi of the Yale School of Management compared the advice of the most popular personal finance books with what the academic literature suggests. Nowadays, young people are more likely to get their advice from so-called finfluencers on social media than from books. Inspired by Choi’s research, I spent some time recently watching the videos of some of the most popular personal finance influencers on TikTok.
While not everything they say squares with what economic and financial research advises, they do offer some useful tips. There are some cranks, as there are in every medium, but most of the advice is similar to what you might find in a book, though geared to the financial needs of twentysomethings. The most common advice includes:
- Have a emergency fund, enough to cover a few months of salary, in a high-yield savings account.
- Keep a budget and make sure you save some money, especially if you get a 401(k) match from your employer.
- Invest in the market, preferably an S&P 500 index fund, though if you have a long enough time horizon, consider picking some individual stocks, too.
This is a little different from what you might find in economic and finance journals. First, economists assume the goal is not necessarily to get rich — to have a million dollars, say, by the time you’re 30 — but to have smooth and predictable consumption throughout your life. When you’re 22 and not making much, saving may not be your biggest priority. Economists would also argue that having some financial cushion in low-risk assets is advisable — but not necessarily if you have lots of high-interest credit card debt because interest rates on credit cards are so much higher than those on a high-yield savings account.
Another difference is in how you invest. Economists also favor diversification, and index investing over active management. But we also believe that an important part of diversification includes foreign stocks. The TikTok crowd has a very strong home bias. We economists would argue this leaves investors under diversified, because it concentrates risk on the fortunes of one country: the one you live in, whose economy is highly correlated with your wages. The S&P 500 is also highly concentrated in a few big stocks.
In fact, on TikTok the very concept of risk management, other than owning the S&P 500 and having an emergency fund, is largely absent. Modern Portfolio theory argues that new assets should be assessed by how they affect overall risk — not just by how much more money they will earn. You should be especially mindful of how your portfolio will perform in a recession, when the odds of job loss are higher (especially when you are young) and most stocks tend to be down.
There is no way to become a millionaire before you turn 30 — unless you inherit money, are a successful pop star, or are a professional athlete — without taking on a lot of risk. The influencers are not upfront about this reality.
This ignorance of risk may explain why personal finance TikTok has fallen for the fallacy of time diversification, which is the idea that the longer your investing horizon, the less risky it is to invest in stocks. So much investment advice on the site is based on the last 20 years of data. Yet the future may not be like the past. Ask anyone who was invested in the Japanese stock market in 2010: There is no guarantee stocks will always come back.
The longer you are in markets, the greater the chance something can go wrong. The finance literature does suggest owning more stocks when you are younger, but not because it is less risky. It is because most of your net worth is in your future earnings, which are bond-like, and as you age they become a smaller share of your portfolio. So TikTok does at least advise the right thing, if for the wrong reason.
The other curious thing about personal finance TikTok is the suggestion that living with your parents is a viable financial strategy, instead of something you do when your life is falling apart. I suppose living with your parents does save money. But living on your own has benefits in terms of personal development.
In general, however, I found a lot of sound financial advice on TikTok. Unlike academic papers in economics journals, TikTok videos are engaging and short, and they are practical in a way that most economists just aren’t.
One of the most common pieces of advice I found on TikTok, for example, is that it is not enough to simply open a brokerage account or IRA — you must select funds, too. Many finfluencers walk their followers through this process. Showing people the mechanics of how it’s done is extremely valuable, and honestly makes many of my concerns feel second-order.
I think back to what I doing when I was 25: studying the best ways to invest and build a firm financial foundation, as part of my Ph.D. dissertation on retirement risk. I was spending so much on rent that I couldn’t afford to buy into an index fund. There was no TikTok back then, of course, but if there had been, maybe I would have rethought that choice.
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